Real estate vs stocks: Is it better to invest in stocks or real estate?
I’ll admit it: There are times that I think everything that needs to be said about personal finance has been said already, that all of the information is out there, just waiting for people to find it. The problem is solved.
Perhaps this is technically true, but now and then — as this morning — I’m reminded that teaching people about money is a never-ending process. There aren’t a lot of new topics to write about, that’s true (this is something that even famous professional financial journalists grouse about in private), but there are tons of new people to reach, people who have never been exposed to these ideas. And, more importantly, there’s a constant stream of new misinformation polluting the pool of smart advice. (Sometimes this misinformation is well-meaning; sometimes it’s not.)
Here’s an example. This morning, I read a piece at Slate by Felix Salmon called “The Millionaire’s Mortgage”. Salmon’s argument is simple: “Paying off your house is saving for retirement.”
Now, I don’t necessarily disagree with this basic premise. I too believe that money you pay toward your mortgage principle is, in effect, money you’ve saved, just as if you’d put it in the bank or invested in a mutual fund. Many financial advisers say the same thing: Money you put toward debt reduction is the same as money you’ve invested. (Obviously, they’re not exactly the same but they’re close enough.)
So, yes, paying off your home is saving for retirement. Or, more precisely, it’s building your net worth.
But aside from a sound basic premise, the rest of Salmon’s article boils down to bullshit.
Lying with Statistics
Looking past the “paying off your house is saving for retirement” subtitle on his piece (a subtitle that was likely added by an editor, not by Salmon), we get to his actual thesis: “Making mortgage payments can, in theory, be a way to accumulate wealth almost as effectively as contributing to a retirement fund.”
I’m glad Salmon qualified this statement with “in theory” and “almost” because this is pure unadulterated bullshit. And it’s dangerous bullshit. Here’s how this “logic” works:
If you buy an urban house today for $315,000 (the average price) and it appreciates at 8 percent a year for the next 15 years, you will be living in a $1 million house by the time you pay off your 15-year mortgage, and you will own it free and clear. Which is to say: You’ll be a millionaire.
For this to be true, here’s what has to happen.:
- Home prices in your area have to appreciate at an average of eight percent not just this year and next year, but for fifteen years.
- You have to take out a 15-year mortgage instead of a 30-year mortgage.
- You need to stay in that house (or continue to own it) for that entire fifteen years.
- Once you’ve become a millionaire homeowner, you now have to tap that equity for it to be of use. To do that, you have to sell your home, acquire a reverse mortgage, or otherwise creatively access the value locked in your home.
The real problem here, of course, are the assumptions about real estate returns. Salmon spouts huckster-level nonsense:
The 8 percent appreciation rate is aggressive, but not entirely unrealistic: It’s lower than the 8.3 percent appreciation rate from 2011 through 2017, and also lower than the 9 percent appreciation rate from 1996 to 2007.
That’s right. Salmon cites stats from 1996 to 2007, then 2011 to 2017 — and completely leaves out 2008 to 2010. WTF?
This as if I ran a marathon and told you that I averaged four minutes per mile…but I was only counting the miles during which I was running downhill! Or I told you that Get Rich Slowly earned $5000 per month…but I was only giving you the numbers from April. Or I logged my alcohol consumption for thirty days and told you I averaged three drinks per week…but left out how much I drank on weekends.
This isn’t how statistics work! You don’t get to cherry-pick the data. You can’t just say, “Homes in some markets appreciated 9% annually from 1996 to 2007, then 8.3% annually from 2011 to 2017. Therefor, your home should increase in value an average of eight percent per year.” What about the gap years? What about the period before the (very short) 22 years you’re citing? What makes you think that the boom times for housing are going to continue?
Long-Term Home Price Appreciation
In May, I shared a brief history of U.S. homeownership. To write that article, I spent hours reading research papers and sorting through data. One key piece of that post was the info on U.S. housing prices.
In that article, I shared Robert Shiller’s research of historical U.S. home prices. The chart is based on data from his spreadsheet, available on his website.
Here’s the reality of residential real estate: Generally speaking, home values increase at roughly the same (or slightly more) than inflation. I’ve noted in the past that gold provides a long-term real return of roughly 1%, meaning that it outpaces inflation by 1% over periods measured in decades. For myself, that’s the figure I use for home values too.
Crunching the Numbers
Because I’m a dedicated blogger (or dumb), I spent an hour building this chart for you folks. I took the aforementioned housing data from Robert Shiller’s spreadsheet and combined it with the inflation-adjusted closing value of the Dow Jones Industrial Average for each year since 1921. (I got the stock-market data here.) If you’d like, you can click the graph to see a larger version.
Let me explain what you’re seeing.
- First, I normalized everything to 1921. That means I set home values in 1921 to 100 and I set the closing Dow Jones Industrial Average to 100. From there, everything moves as normal relative to those values.
- Second, I’m not sure why but Excel stacked the graphs. (I’m not spreadsheet savvy enough to fix this.) They should both start at 100 in 1921, but instead the stock market graph starts at 200. This doesn’t really make much of a difference to my point, but it bugs me. There are a few places — 1932, 1947 — where the line for home values should actually overtake the line for the stock market, but you can’t tell that with the stacked graph.
As the chart shows, the stock market has vastly outperformed the housing market over the long term. There’s no contest. The blue housing portion of my chart is equivalent to the line in Shiller’s chart (from 1921 on, obviously).
Now, having said that, there are some things that I can see in my spreadsheet numbers that don’t show up in this graph.
Because Felix Salmon at Slate is using a 15-year window for his argument, I calculated 15-year changes for both home prices and stock prices. I’ll admit that the results surprised me. Generally speaking, the stock market does provide better returns than homeownership. However, in 30 of the 82 fifteen-year periods since 1921, housing provided better returns. (And in 14 of 67 thirty-year periods, housing was the winner.) I didn’t expect that.
In each of these cases, housing outperformed stocks after a market crash. During any 15-year period starting in 1926 and ending in 1939 (except 1932), for instance, housing was the better bet. Same with 1958 to 1973. In other words, if you were to buy only when the market is declining, housing is probably the best bet — if you’re making a lump-sum investment and not contributing right along.
Another thing the numbers show is that you’re much less likely to suffer long-term declines with housing than with the stock market. Sure, there are occasional periods where home prices will drop over fifteen or thirty years, but generally homes gradually grow in value over time.
The bottom line? I think it’s perfectly fair to call your home an investment, but it’s more like a store of value than a way to grow your wealth. And it’s nothing like investing in the U.S. stock market.
For more on this subject, see Michael Bluejay’s excellent articles: Long-term real estate appreciation in the U.S. and Buying a home is an investment.
Final Thoughts
Honestly, I probably would have ignored Salmon’s article if it weren’t for the attacks he makes on saving for retirement. Take a look at this:
If you’re the kind of person who can max out your 401(k) every year for 30 or 40 years straight — disciplined, frugal, and apparently immune to misfortune — then, well, congratulations on your great good luck, and I hope you’re at least a little bit embarrassed at how much of a tax break you’re getting compared to people who need government support much more than you do.
Holy cats! Salmon has just equated the discipline and frugality that readers like you exhibit with “good luck”, and simultaneously argued that you should be embarrassed for preparing for your future. He wants you to feel guilty because you’re being proactive to prepare for retirement. Instead of doing that, he wants you to buy into his “millionaire’s mortgage” plan.
This crosses the line from marginal advice to outright stupidity.
There’s an ongoing discussion in the Early Retirement community about whether or not you should include home equity when calculating how much you’ve saved for retirement. There are those who argue “absolutely not”, you should never consider home equity. (A few of these folks don’t even include home equity when computing their net worth, but that fundamentally misses the point of what net worth is.)
I come down on the other side. I think it’s fine — good, even — to include home equity when making retirement calculations. But when you do, you need to be aware that the money you have in your home is only accessible if you sell or use the home as collateral on a loan.
Regardless, I’ve never heard anyone in the community argue that you ought to use your home as your primary source of retirement saving instead of investing in mutual funds and/or rental rental properties. You know why? Because it’s a bad idea!
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There are 69 comments to "Real estate vs stocks: Is it better to invest in stocks or real estate?".
The author of this article says if you max out your 401K you are getting an undeserved tax break, but yet he advocates paying mortgage payments that also get you some decent tax breaks! ???
1) Very few people get a tax break on their mortgage. And the tax break they get is only on the interest they pay.
2) If you are going to talk about return on investment on a home you can’t look only at appreciation any more than you can ignore dividends on stock or interest paid on bonds. The main return on a home investment is the cost of rent.
3) Homes are the primary source of net worth for good reason. It is really the only investment people can leverage. So if you put $100,000 down on a $500,000 and it appreciates 3% to $515,000, you got a return of 15% on your investment. Of course you paid interest on your mortgage as well, so you likely lost money the first year. But the payment on your mortgage will remain flat for the next 30 years and the interest you pay on it will decline. If you start out with a mortgage payment equal to your rent, you are going to have come out way ahead. Arguably far ahead of investing $100,000 in the market and paying increasing rent for the next 30 years.
3) People don’t really get much of a tax break on their 401(k). The taxes are only deferred and they end up paying them when they take their money out to spend. The primary beneficiary of the tax break is the finance industry. The money they take out in fees is never taxed and that is the primary cost to the treasury. A cost the rest of us make up for in higher taxes.
4) The problem is that there is a lot of bad information out there. Much of it is finance industry propaganda designed to generate more investment fees.
And it does not take good luck to save a little bit of each paycheck even through hard times . . . The author of this article is probably an idiot.
Here is what he said:
“If you’re the kind of person who can max out your 401(k) every year for 30 or 40 years straight — disciplined, frugal, and apparently immune to misfortune — then, well, congratulations on your great good luck,”
The maximum contribution to a 401(K) is $18,000 is over half the median wage in the United States and more than someone making minimum wage makes in a year. Being able to contribute that amount for 30-40 straight years requires more than being disciplined and frugal, it requires that you have an upper middle class income for most of that time. And it requires “luck” of avoiding major financial pitfalls, like cancer.
I agree. “Luck” also has a lot to do with whether or not you develop a chronic illness or some non-cancer ailment that can wipe you out both physically and fiscally. Multiple sclerosis and severe rheumatoid arthritis are two example that immediate pops into my head.
Luck might also affect whether you give birth to a child with a severe ailment. Whether the illness is yours or a kid’s, you’re likely to spend a lot more time at the doctor’s office and/or hospital, and pay a lot of non-covered expenses, and not be able to work as much. One result would be the inability to save as much for retirement, let alone a home; another would be that you pay less into Social Security.
A third result: People who are chronically or seriously ill, or who have partners who are, might lose the second income either temporarily (since the person can’t work as much, or at all) or permanently (when the person goes on disability, or can’t get approved for disability, or decides s/he can’t handle this being-partnered-with-a-sick-person/having-a-sick-kid thing and takes off).
Bonus points for those who as an outcome of such issues can’t get training for/can’t remain in high-paying jobs. When you’re making minimum wage it can be hard to make ends meet, let alone think about the future.
Hard work matters. Saving matters. Investing matters. But when you’re in the trenches, these things might not be as possible, or simply might not FEEL possible. Without a good support system, money mentor or financial planner, you can give in to the lack of cash, the exhaustion and the just plain hopelessness.
I’ve got a dog in this hunt, since my daughter has a couple of chronic conditions, one of which stems from a neurological illness (details at http://donnafreedman.com/you-cant-even-tell-perfect-bodies-apart/). Hers is one of the “happy” endings, in that she was supremely fortunate to find an at-home gig that permits her to have time off for medical visits or extra rest.
For every happy ending, though, there are likely millions of barely-making-it or bankruptcy cases. I say this not to rain on everyone’s parade but to remind people that plenty of folks work hard and try to save, but are unable to dig themselves out of tough situations.
And J.D.: Like others, I look forward to reading your piece about why homeownership is worth it to you. No doubt it will be a warts-and-all article, which is what some people desperately need to learn before they follow the home-buying herd and make a decision that ultimately isn’t right for them at this time (or maybe ever).
However, people making minimum wage can’t afford homes so they don’t play into this argument anyway.
It may be true that most topics about finance have been said already – but there are always new people that want to get involved. Therefore, there is no such thing as “old” information.
Great read!
Thank you JD for reading the stupidity so the rest of us don’t have to. I feel dumber just having read the excerpts and I now want to sit in a corner and rock myself until the bad man goes away.
I wonder if you could reach out to this guy, writer to writer, and maybe interview him and see if you can fix some of the stupid. If you can get through to him you might have some really good material for your “back to basics” posts.
I would definitely have to say stock market. But, it helps to diversify and home provides a nice diversification.
I think this is a different point than the linked article was making, but I do think the analysis is a little more complicated than simply comparing changes in asset values (DJIA versus housing) over a long period of time. Leverage is legally permitted to a far greater extent in housing and other real-estate investments than in stock investing, and investors aren’t subject to margin calls on real estate investments like they are in stock investments, so leverage in the real estate market isn’t quite as risky as leverage in the stock market. An interesting comparison (which I don’t think I’ve seen) would be a levered rate of real estate return vs either levered or unlevered stock investing.
Wow, Salmon is making some truly ignorant statements! Especially his attack on folks who have the discipline to save! Could there be a little bit of envy going on there? Maybe Salmon’s got most of his net worth tied up in his house? Just sayin’!
Diversify, diversify, diversity. Ideally, you should hold mostly stock index funds that appreciate more quickly, but also some bonds, CDs, Treasuries, and a paid-off house so that in good times you can float steadily upward, and during downturns (or job layoff) you’re in a low-cost housing situation with some stable stuff to draw from. That’s the goal.
My net worth isn’t really that important to me during my income earning years. Where it becomes important is during retirement when my assets have to be able to support me.
If you consider a rate of return of 4% for your liquid assets, a paid off house is worth the amount of money you don’t have to have in liquid assets to pay rent every month.
If rent would be $20,000 a year, the value of my paid off house is $20,000/.04 or $500,000 assuming I don’t plan on moving. Of course this ignore maintenance.
I concur he is nuts. We need to live somewhere when we stop paid employment. Why not stay in this 1991 purchased home long ago paid off? And it’s only worth 3X what we paid….nowhere near a million. We could sell it and have to pay much more to replace it in the part of town we want to reside in for our later years.
So kind of you to save us the time of reading his detritis.
Wow, so my being disciplined, responsibly planning for my future and lifelong saving is “good luck”. Then he has the nerve to shame me for that. If my house was my retirement vehicle then I would have that pesky issue of having to sell it to access my retirement funds. Bad plan in general.
Thanks but no thanks. I’ll keep hanging out with the responsible people as we plan for our futures and enjoy living in our present day life without the latest expensive toy.
Once the house is paid off, is it fair to consider the money I’m not spending on rent or the mortgage as income? That’s an additional $X per month that I can invest, spend, or donate.
I wouldn’t think of it as income, but as lowering your expenses, which translates into a lesser amount of retirement assets needed. If you are aiming to amass enough assets to support a 4% withdrawal rate in retirement, then if your expenses plus mortgage is $40,000/yr you would need to save $1,000,000 to retire. By paying off your house, if that would hypothetically drop your annual expenses to $28,000 (sans mortgage payment), you only need to have saved $700,000. That’s why paying off your mortgage before or at retirement is such a boon in my opinion, it means you have to save much less than you otherwise would. In this case 30% less!
Real estate is something you can see, feel, and utilize. Life is about living, and real estate can provide a higher quality of life. Stocks aren’t event pieces of paper anymore, but ticker symbols and numbers.
In general, toddlers need to put everything in their mouth and feel everything with their hands.
When you grow up, you can start to be able to have a more abstract understanding of the world you live in.
The words you use (a house is something you can see and feel, stocks are ticker symbols) make me believe that you haven’t fully reached maturity yet. Perhaps some day.
I disagree that the desire to not invest totally in something abstract, is a sign of immaturity. Just different values. I cannot thing of anything more mind-numbing than working long hours, to make the most money, to invest in stocks that I can one day benefit from. I’d rather work long hours, making the most money, to invest in something that I am both passionate about, good at, and earns me money. Therefore I am choosing to invest in real estate. I’ve met amazing people, made lifelong friends, learned real-world skills, and made more money so far, than I have made investing the same amount money in stocks.
Some people get a kick out investing in stocks (I often find those are people with high incomes…but when you can only invest so much each year, and it doesn’t grow as fast…it’s less sexy and invigorating). Some people choose to invest more in a business, instead of stock.
The fact is, we don’t know when our time is up and if we will get to profit from something so far into the future, so if there is a way to enjoy your assets while earning on them, then I don’t see that as a problem. As long as you know what you need to earn, and have a game plan, and check in often on the progress, alternative investing can be very fulfilling and profitable.
hey lmoot!
it’s been ages
what you’re doing i think is not just an “investment” in the sense of compounding savings, but a side business—a 2nd job that you do after hours.
different story altogether and not quite what salmon advocates either.
Besides the fact that the stock market easily out-performed the housing market over that longer period of time, houses take maintenance. The author is not calculating all the money you’re dumping into your house to fix things. I don’t know about anyone else, but I never had a mold problem or had to fix a leaky faucet on my index funds.
I wonder if the author lives on one of the US coasts, where housing does usually appreciate faster than other areas of the country? I am glad you did an article about this, JD, I did go read the article and thought it was kind of nuts. In our family, a paid off house for retirement is left to the surviving spouse for an asset to help pay in case they need nursing home care. Unfortunately, it was not enough to pay for the long term nursing home care both of our grandmas experienced, so they both ended up on Medicaid.
“Unfortunately, it was not enough to pay for the long term nursing home care both of our grandmas experienced, so they both ended up on Medicaid.”
Which describes perfectly the problem with a retirement system that relies on individual savings. Unless you are wealthy, you can’t save enough to be truly secure for the rest of your life. “Lucky” people die before the money runs out.
Felix also said recently that people who have $1M in 401k’s are taking a ridiculous risk, oh but a $1M house is cool?
https://twitter.com/felixsalmon/status/1017433294026223616
Wow! This guy is something else. Something he also apparently misses is the people who don’t have the “good luck” to invest consistently in their 401Ks are also the people who address their “bad luck” by cashing out their home equity and/or defaulting on their mortgages. Somehow I managed to retire with $1M in my retirement accounts, and I could only afford to max out my contributions for the last few years of my 30-year career. However, I started saving the day I started working! I also paid off my mortgage, but guess what? My house is worth almost exactly what I paid for it when I bought it in 2007. Adjusted for inflation, maintenance and home improvements I’m probably WAY in the hole.
While I agree with JD’s overall point, I think it’s only fair to note that Salmon specifically talks about urban housing, and my guess is he isn’t talking about Oklahoma City, but rather NYC, LA, SF, Boston, etc. If you only look at those markets, and you figure in the growing difference between rent and paying down principle and the high likelihood of significant rent increases in those areas (v. static mortgage payments) it likely looks much closer than the graph JD shows. That, and it allows for diversification of an asset portfolio since most folks aren’t investing in real estate in any other way than homeownership.
Excellent point, Josh. In my righteous anger I missed the whole “urban” thing. Thank you for catching this.
Even in an urban setting, to commit your whole savings to an illiquid financial instrument with no diversification is still stupid.
Well, his price and growth numbers came from somewhere. $318k doesnt sound like LA, NY and SF to me, but it came from somewhere and it should be traceable.
As someone who just sold their suburban home and am happily renting in an urban environment, I have no doubts that renting was the right financial move. I’ve done detailed comparisons of buying and renting in my area, and I’m absolutely saving by renting. What I was paying in mortgage principle is now going to a savings account which will yield interest to subsidize rent in retirement.
Only if/when there’s a significant correction (>20%) would I consider entering the Boston housing market again.
I just heard something similar on the radio. The host said if you invested the same amount in a house over the last 15 years, you’d beat the market. The S&P 500 returned 5% and housing returned 8% or something like that.
I’m pretty sure they left out all the other cost of homeownership, though. Utilities, property tax, repair and maintenance, furniture, etc… Owning a house involve much more than paying the mortgage.
Anyway, good study.
Note that with a “home” (i.e. a house that you are living in while you pay it off), one shouldn’t (in my opinion) count the full amount one is paying towards the mortgage, but rather the difference between that and what you would be paying to rent a living space. E.g. If buying your home costs you $1200 a month and the rent you would be paying is $800 a month, you are really only investing $400 a month (plus taxes and maintenance).
Good post JD-I generally like Felix’s stuff on Market Place, but he is way off here. One additional angle would be location of the home. About 1/3rd of our net worth is tied up in Florida Real Estate (home, land, rental property), but we’re comfortable with that because the of the demographics of the area.
Mr. Pop — What about climate change and flood insurance? I don’t know where your real estate is located in FL but aren’t buyers getting skittish about those risks?
Let’s see. I bought my home in 1985 for $135,000. The bank gave me a 25 year mortgage. Today, my house is worth $1.25million. Unfortunately, I sold it in 2015 and only got $996,000. Bummer, eh? I bought another home in my new retirement location for $160,000 and put the rest of my money in cash accounts. I never liked Wall Street. Oh and yes, combined with my meager savings account, thanks to my house, I retired a millionaire. My home did all the work for me. Not the other way around.
Herman, you got a abnormally high rate of return on your house – about 6.9% vs the normal 3-4%. I’m guessing you may have put some time and money into upkeep or additions. If you’d invested that money into “wall street”, it would have grown a little over 11%/year. That would have netted you about…$3,000,000. Having said that, you didn’t make “the wrong” decision, but one that clearly was right for you. And you still retired a millionaire, congrats!
This analysis is apples and oranges on so many levels. For example: if you “invest” in your home you are putting your money into a single property, not into “the market”. The major reason most of us invest in indexes is because of the volatility of individual stocks. An individual company can plunge (or take off) while the overall market does the opposite and the same is true of a house (as people in Houston without flood insurance can attest).
Second, I dislike these kinds of comparisons on both sides because it’s like saying a hammer is better than a screwdriver, when it really depends on what the job is you want to do.
Prudent people own a house (or have some kind of investment that would mimic that stability) and also own stocks and are also insured (I shudder to think what he’d do with the “investment” into insurance). Those are different financial tools that you hold for different reasons. Arguing between them is foolish.
“The bottom line, somewhat surprisingly, is that the average annual price increase for U.S. homes from 1900 to 2012 was only 0.1%/year after inflation!” http://observationsandnotes.blogspot.com/2011/07/housing-prices-inflation-since-1900.html.
Why? Because if real estate appreciated faster than inflation, after a couple of decades, people would spend their entire paychecks on housing and it would literally eat up the entire economy. (remember the lesson on compound interest).
Or live in a shoe box like me, while watching healthcare eat the conomy.
I bought my apartment in 2012 (see user name for where). Got lucky. Timed it right. Yes, it’s appreciated insanely. Do I focus on that at all? No. The subway is shutting down in my neighborhood for repairs. That is a HUGE risk. Who knows what it will do to the value of my apartment. There are so many risks with housing. Neighborhoods change. Tastes change. Yes, Brooklyn is probably one of the most desirable cities in the world right now, but will it be forever? Who knows. The only way to make money on my place is to sell now. And then where the hell am I supposed to live. Your house is a house, not a financial asset. Unless you buy as an investor.
“I hope you’re at least a little bit embarrassed at how much of a tax break you’re getting compared to people who need government support much more than you do.”
This is a pretty ignorant thing to say. Welfare (or any government support) is not a huge bucket of money that when it runs out they stop handing out benefits. Anyone who applies gets it. You’re not depriving someone of a meal or home by taking tax deductions.
Where does someone so out of touch and dare I say dumb find a writing job?
“I read a piece at Slate…”
OK that explains it 🙂
Not just that.
People taking tax writeoffs are, generally, tax PAYERS. People who get welfare typically aren’t.
So essentially he is saying tax payers take money from poor people when they pay less in taxes.
> Once you’ve become a millionaire homeowner, you now have to tap that equity for it to be of use.
That’s not true, and the reason why is the primary reason I want to have my house paid off in retirement. Having no mortgage payment on a $1,000,000 house pays dividends equivalent to the mortgage payment on a $1,000,000 house, or roughly $5,000/month.
Yes, you can argue you may have gotten better returns in the stock market, and you could use that money to pay the $5,000/month housing payment, but the returns on the mortgage payment are guaranteed (not guaranteed to be $5,000/month, but guaranteed to cover the cost of living in a house just like yours in your area).
So, no, you don’t have to sell (or borrow against) your house for the investment in paying off your mortgage to be useful, because it lowers your monthly expenses by a lot.
That’s a nice simple way to look at the return from a personal-use real estate investment from a slightly different angle. Well put.
First time commenter here! First off, thank you for these posts JD! GRS is one of just two saved sites on my phone’s browser for ease of compulsive checking!
Now, don’t get me wrong, I appreciate this and other recent posts on the perils and difficulties of home ownership, but they’re sort of piling up into a major downer as I read them! Maybe it’s just my confirmation bias speaking, but I think myself VERY lucky to have been able to buy a home!
Obviously, luck and timing were huge factors in making this happen. And committing to one location long term is absolutely NOT for everyone. But can’t you do a post extolling the possible benefits of home ownership for when it DOES make sense to buy one?
For example, I consider home ownership the best form of rent control there is. I live in the Bay Area so… let’s just say the rents are really scary these days.
Additionally, we have pets! Finding a rental that lets us keep our 6 indoor cats would not be easy…
There’s a raft of other benefits that I could go on about, like having the power to house my parents or family, getting tax deductions, that one time I was able to get a second mortgage to cover emergency tax expenses, the possibility of the house generating passive income in the future, the freedom to come up with and implement creative solutions to on-property challenges…
Your latest articles make it sound like owning a home is a deal for suckers! Can’t you write something talking about the payoffs that home ownership can bring if (and I admit it can be a BIG if) it’s honestly financially feasible for someone and the real estate market isn’t priced ridiculously?
As a retiree I do not see my house as a cash cow. We saved AND we paid off the house AND we stayed with jobs that had pensions. It is a balance. As another commentator stated, don’t argue between hammers and screwdrivers. You need them both. If you are FIRE, things may be different, but what percent of the nation is?
I contend that the writer of the article did not say not to save, he stated that you are much more likely to save in a house then in the market. “The return on stocks you never buy is always zero.” About 40 million retirees have no savings- but still live somewhere. “The average citizen” is more likely to pay their mortgage monthly(64%) then buy a stock (52%). Both have to have a place to live. He is right in IF you want to stay in a high cost area after you retire, renting would be cost prohibitive. We have a good friend who bought a house in San Jose for $135,000 in 1987. It is now worth 2.5 million (even with the recession in between). Never making big figures he sits in a great neighborhood on a small pension and SS. Sounds like the area the author lives in. Seems like you just had that issue in Portland.
My daughter and sil bought a house because they plan on being in the high cost area for at least twenty years. Their house has increased by 30% in five years. Their mortgage is 3%. Renting in their area is already almost $1000 more a month then their mortgage. Still, they are saving and working to be fully retired when their last child goes to college. They, too, are getting rich slowly.
There is no “right way”. Salome may be an idiot for pontificating about housing in NYC. He did get you to read his article and talk about it 🙂
Could you clarify “Their mortgage is 3%”?
The interest rate on their mortgage is 3%. Sorry I shortened that to our household terms.
Thank you! My first thought was that was simply an exceptionally low mortgage payment as it relates to their income. But it being a rate makes so much more sense to me.
Challenge accepted! This is a great comment, Carmine. Thank you. The truth is, I am not anti-homeownership. However, I hate the propaganda spewed by the real-estate industrial complex, propaganda designed to convince people that homeownership is some sort of financial panacea. That’s why I’ve been ranting over the past couple of months.
Having said that, I think you’re on to something: I need to write an article that summarizes all of my beliefs about housing — and why, even with all of the negative stuff, I still choose to own a home and think it’s a fine idea for many folks. I’ll aim to do so for Monday or Tuesday (but no promises)!
Yes and …
1) Factor in leveraged returns – (as others have mentioned)
2) Note that some geographical markets exceed the typical rate of appreciation. See comments above about Bay Area and other metropolitan markets.
3) You gotta live somewhere – either paying mortgage or rent.
4) Yes, your maintenance expense is higher if you own vs. rent.
5) At least *mention* the field of investment real estate. If it’s a house I don’t live in, I can sell it and realize the ROI.
Yes, these things have been said before, but not by you, and not to this specific audience. We like to read what you write. Thanks for your work.
I love how the article author intentionally left out the down years of home values! It just goes to show:
“Statistics are like bikinis – they show you a lot, but they can cover up some very important things.”
I do not know Felix Salmon nor have I head this article (or any of his articles and probably never will). However, based on the excepts I see in JD’s article, Felix most likely is a journalist, not an actual investor who is a millionaire….just speculation on my part. He comes across as a “Not Expert” (as seen on ESIMoney.com). Years ago, an LA Times business journalist blasted the book “The Millionaire Next Door” saying it’s not possible for the average person to become a millionaire. I emailed the journalist as I disagreed strongly with his “sour grapes” article. In the end, he wrote to back to me that I was “lucky” to have become a millionaire based on the timing of my investing into the market. Why can’t “not experts” financial journalists accept the fact that ordinary people can and do become millionaires.
Years ago, an LA Times business journalist blasted the book “The Millionaire Next Door” saying it’s not possible for the average person to become a millionaire.
Hmmmmm, we are quite average and we reached millionaire status and 2 paid off homes by age 50. We continue to work and invest in our 401k/403b to further enhance retirment funds. I remember buying and reading that book. It was motivating. Our other motivator was “Your Money or Your Life”. Practicing (most) of their principles was fiscally life changing for us!
“Years ago, an LA Times business journalist blasted the book “The Millionaire Next Door” saying it’s not possible for the average person to become a millionaire.”
The real criticism of the book was that it made being a millionaire sound unusually rich and financially set for life. That just isn’t reality. There are lots of paper millionaires out there in the American middle class. If you accept the 4% rule, a million bucks in your retirement account gives you $40,000/year to spend, minus taxes. That doesn’t count the folks whose house is now worth a million bucks even though its no more valuable as a place for them to live.
Airbnb that crap and MAKE it an investment. The market is not the only thing to determine the ROI of a house (unlike the stock market). There is plenty you can do to profit from real estate…and no, I’m not talking about a career real estate investor. I feel like to ONLY present the market average, completely ignores the many ways people use property to make money (home business, roommates/tenants/short-stay guests, sweat equity, wholesale).
I am one of those wackadoodles that only contributes to retirement up my employer match…and the rest goes towards capital and improvement of real estate. My house is valued at nearly $100k over what I paid 9 years ago, and that doesn’t count all of the money I’ve gotten from renting space out to friends and coworkers. I could never have saved/earned that much money if I just maxed out my 401k.
I love the feeling of control I have, and I find real estate more inspiring and interesting than busting ass in order to shovel money into stocks. That’s not the existence I want…working hard to bankroll corporations. I consider real estate investing a social service of sorts, and it’s engaging to learn about.
Real estate AS an investment is another issue entirely and doesnt seem to be what the author was arguing.
But a lot of people these days profit from their home without being “real estate investors”. That’s why I pointed out “career investors”.
I can understand using stock market data to determine ROI over a period of time…what you see is what you get. But it’s not always as simple to look at a real estate property’s value on paper and say “this is the total value this property will provide/has provided”. It’s a tangible thing that has value outside of resale value, and has the ability to earn money without selling (and yes, lose money through upkeep as well).
For example, someone with a lot of equity in their home can borrow from it to invest in other things. The reduction in equity doesn’t affect the value of the house. You sell shares to get cash, and the value of your investments can potentially go down.
I’m not saying this to say one is better than the other, but rather to highlight what I believe is often a false equivalence between real estate and stock market investing.
Also, why shouldn’t real estate investing be compared? How come INVESTING in the stock market is not compared on equal footing to other forms of investing? I’m putting my tin-foil hat on right now, but perhaps the numbers might not show as favorably to the market. The goal of market investing is to profit…that’s literally its only job; and yet we compare that to an action (buying/paying off a house), in which that is not necessarily (or often) the goal. Talk about low-hanging fruit. And the funniest part is it’s not always that far behind in terms of ROI…without even trying! It’s like losing a close race you didn’t even know you participating in…are you really a loser then if you got that far ahead?
I’m sorry, I’m having a hard time following your string of thoughts. Real estate investing is investing. And yes, there are various ways to invest in real estate, airbnb included. But this article was about how buying a home, as just a personal-use single-family home, as an investment.
As I said earlier, a house is A form of investing, but I wouldn’t recommend it any more than I would recommend someone tie up a significant portion of their net worth in an individual stock. It makes your net worth way too sensitive to changes in that very specific investment.
We could argue all day long about specific investments, and many people do, but this analysis is so poorly laid out I don’t find it useful when deciding on an investment strategy.
I know they didn’t talk about it. That was my point. Whenever I see these match for match comparisons between the growth of residential real estate and the growth of stock value, they never consider the hidden opportunities to increase ROI from residential real estate. To say it’s not a valid consideration because that’s not what most people do, is just as crazy to me as saying learning how to maximize your 401(k) is not important because most people don’t care enough to learn about it.
I know plenty of people, and you only need to look at ads on craigslist and Airbnb, who are renting rooms out of their homes short term or long term; young married couples, empty nesters, singletons wanting help with the mortgage, etc. And it can increase cash flow by $10k and up per year easily (in urban areas…to keep on theme). This is not chump change. I think there is a benefit to showing what is possible, for both sides of the comparisons, although it is more difficult if not impossible.
Now reading the article that was linked to, I don’t agree (if I interpreted it correctly), that you should purchase a more expensive house in the hopes that it will provide a larger return on investment. My comment was made in the hopes of encouraging those who are more interested in alternatives to just investing in a 401(k), but may feel dissuaded by the popular theoretical conclusion that ROI will always be a higher average for stock, than real estate.
I stand by my claim that ROI for residential real estate, is not as simple as measuring the value of the property. Unless you actually have the numbers for how much someone profited from their home (HOME, not investment property….which is why I gave the examples of ways people profit from their primary residence), you are not using accurate values.
How many homeowners who had roommates paying half or all of the mortgage, were included in these surveys? That’s what I want to know. How many homeowners ran businesses from their home that they would not of been allowed or able to do if they were leasing? I want to know that too. I want to know how much they profited. It matters. How many of these homes were homesteads, which provided food and water, possibly sustainable energy?
You may not think it’s valuable to the discussion because it may not be typical, but how do we know what the norm is if only one part is included in every analysis. Just like some people are more on top of managing their 401K and indexes, there are homeowners that are able to get a better return (or additional return) on their property. The difference is those who have high performing stocks get included in the average, because it’s easier to measure, but homeowners who are able to profit from their residential properties, unless it affects the value, do not see their returns included in the average.
And I agree I am not the best in conveying my thought process, but I hope I was able to clarify a bit where I was trying to go.
Ultimately, wealth should be measured by the total value of assets that can be tapped into and converted into consumption today. Whilst I admit that you could downsize your home the likelihood is that you’ve purchased a home to live in. As such, I don’t consider a home to be an investment. Rental properties, bonds, stocks, pensions are all forms of investments that could be liquidated (some take longer to complete this process than others) in order to consume today. Financial freedom is unlikely to be achieved by paying off your home. You need income generating assets….invest in the stock market, not your home.
Small copy editing note, then feel free to delete this comment. (I looked for a way to private-message you but couldn’t find one on the site.) It’s “Dow Jones Industrial Average,” not “Down Jones.” At first I thought it was a typo but the error appeared twice.
Haha. That’s muscle memory kicking in as I type, then yes poor copy-editing skills. Thank you!
El Nerdo, Imoot (L or I??), Tyler K … Wow, it really is like old times around here! Maybe nicoleandmaggie will show up. So glad to see this community come back to life.
JD — in Excel you want your chart to be a regular “area” instead of “stacked area”. You can right-click on it and choose “change chart type”. Cheers!
Once you take into account the implicit income from owning a house (=not having to pay rent), a house is an excellent investment even at very low rates of home price appreciation. Or, in other words, your chart equities vs. home prices is terribly misleading because last time I checked, you can’t live in your equity portfolio. If you subtract your rental payments from the equity return you’ll get a very different picture.
See the example calculation on how a 2% home price appreciation turns into a 12% IRR when taking into account all the costs and benefits of homeownership:
https://earlyretirementnow.com/2017/11/15/that-house-over-there-is-an-investment/
As always, you make great points, Big ERN. Thanks.
Much is nebulous. I replaced a roof and windows a few years ago $30K. Redid the bathrooms $15K. Replaced 2 air conditioners this year $10K. My buddy replaced his septic system $25K after all ya gotta poop, oh yea property taxes, and so on and so on and scooby dooby dooby. On the other hand it’s survived more than a dozen hurricanes unscathed. I’m glad I own my home but I think it’s pretty much a wash.
I think having a plan that had diverse sources of income/savings is important. We have a house in the fringe of Seattle metro. Every year, the city marches closer. We will have our house paid off when we retire. This gives us the option to sell at what is hopefully a rather profitable price. We could also rent it (I have owned rentals for over 10 years so I get what this entails). We also have money in 401k/IRA accounts. We also have after non-retirement savings/investments. We also own rentals. Somewhere in there we will manage to retire, have somewhere to live, and be able to enjoy life a little.